Accounting for a Not-for-Profit Organization's Fund-Raising Costs

Healthcare Financial Management, Feb, 2001 by Stan J. Clark, Charles E. Jordan

The AICPA's Statement of Position (SOP) 98-2 provides guidance on how a not-for-profit entity should account for costs associated with activities that involve a fund-raising component in combination with one or more mission-related components. Costs may be allocated among the various components of such an activity as long as the activity meets certain criteria specified by SOP 98-2. These criteria are related to the activity's purpose, audience, and content. If the activity does not meet the criteria, then all costs of the activity must be shown as fund-raising costs.

A key concern for anyone examining the financial statements of a not-for-profit entity is how effectively the entity uses monies it receives from donors. One effectiveness measure is the percentage of these monies actually going to programs to further the mission of the entity versus the percentage going to raise more funds. The classification of costs as either program or fund-raising costs affects this measure of effectiveness.

The AICPA's Statement of Position (SOP) 98-2, "Accounting for Costs of Activities of Not-for-profit Organizations and State and Local Governmental Entities that Include Fund Raising," issued in March 1998, provides clear guidance on the classification, allocation, and reporting of costs to their functional categories for joint activities that include a fund-raising component. "Joint activities" applies to all activities that have both a fund-raising and a non-fund-raising, or program, component.

Such joint activities are quite common and can take many forms. An example would be a marketing mailing that contains information on reducing the risk of contracting a certain disease (the program component) along with a request for a donation (the fund-raising component). Other forms of joint activities include speaker meetings, dinners, walkathons, and telethons.

Scope and General Requirements

SOP 98-2 applies to all not-for-profit and state and local government entities that solicit contributions. SOP 98-2 was issued to amend previous guidance for such entities on accounting for the costs of activities that include both mission-related and fund-raising components. Such previous guidance includes AICPA accounting guidance for healthcare organizations, not-for-profit organizations, and audits of state and local governments.

SOP 98-2 establishes three criteria that an entity must use to determine whether the costs associated with a joint activity can be allocated among their appropriate functional categories. These criteria relate to the activity's purpose, audience, and content.

Assume, for example, a joint activity consists of a program component and a fund-raising component. Costs directly related to the program component are $15,000, costs directly related to the fund-raising component are $20,000, and joint costs of $10,000 are incurred. If the activity meets the three criteria of SOP 98-2, then the program costs are shown as program costs, the fund-raising costs are shown as fund-raising costs, and the joint costs are allocated between program and fund raising. If any of the three criteria are not met, however, then all costs must be shown as fund-raising costs, including the $15,000 directly related to the program component. The one exception to these general requirements relates to costs of items that are "exchange transactions" (eg, the cost of a meal provided at a dinner meeting that failed one of the three criteria). Costs for exchange transactions would be shown as cost of sales for the activity.

Purpose criterion. The purpose criterion entails three tests of whether the activity in question accomplishes program functions or management and general functions of the entity:

* Compensation test;

* Similar program/same medium test; and

* Other evidence.

The compensation test concerns whether the majority of the compensation to any party for his or her performance related to the activity varies on the basis of the contributions received due to the fund-raising aspect of the activity. If there is such variance in compensation, the activity automatically fails the purpose criterion. The assumption is that paying a party for performance related to an activity on the basis of how much money that activity raises gives that person an incentive to tailor his or her performance to encourage the audience to contribute. Under such circumstances, the central purpose of the activity is deemed to be fund-raising, and all costs should be considered fund-raising costs.

If the activity passes the compensation test, the remaining tests are used to determine whether the purpose criterion is met, The similar program/same medium test looks at whether the entity conducts essentially the same program in the same medium but without requests for contributions. If so, the activity meets the purpose criterion. If not, then the entity must look at other evidence.

The entity may consider various types of other evidence. For example, the entity may focus on whether the program component of the activity calls for a specific action on the part of the recipients (the audience) in line with the entity's mission. Another example of other evidence provided in SOP 98-2 is the entity's method for measuring the activity's effectiveness. If the effectiveness measure is program results and accomplishments, the purpose criterion is likely to be met because the audience's actions in response to the activity can be viewed as program enhancing. If, however, the effectiveness measure is the level of contributions received, the purpose criterion most likely is not met.